Blog: Catholic Health Initiatives' $1.5 billion taxable deal

Later this week, Catholic Health Initiatives is expected to enter the taxable market to borrow $1.5 billion, joining a string of not-for-profit systems that have bypassed tax-exempt debt thanks to the flexibility and recent favorable rates found in taxable markets.

“Tax-exempt debt is a really terrific, low-cost financing vehicle, but it's a lot more difficult to accomplish because of the way the rules work,” said Linda MacDonald, vice president of treasury services for the Englewood, Colo.-based system. Taxable debt allows borrowers to move more quickly, she said.

Tax-exempt debt also has restrictions on how it can be used that don't exist for taxable debt. To be financed with tax-exempt bonds, acquisitions and other assets that require capital investments cannot be for-profit. Borrowers must limit the for-profit use of projects financed by tax-exempt bonds to 5% until the bond is paid off.

That restriction, however, has been offset historically by the lower borrowing costs in tax-exempt markets compared with taxable debt. But lately that gap has narrowed, prompting some not-for-profit borrowers to issue their first-ever taxable public bond deals. That was the case with the Mayo Clinic in August.

Financing will cover the $500 million to $550 million cost to acquire the 50% of Alegent Creighton Health from co-owner Immanuel, MacDonald said.

MacDonald said Catholic Health Initiatives could also use the taxable financing to invest in insurance acquisitions to support the system's efforts in some markets to prepare for new payment models that require providers to assume greater financial risk.

Moody's Investors Service said the financing will also be used for ambulatory and physician expansion and technology investments.

Pricing for the Catholic Health Initiative's bond is scheduled for Oct. 25.